The present invention relates to a securities trading system comprising computer-implementable program software intended for implementation with supporting hardware. It relates to a securities trading system which enables securities traders, or other users, to make and hit bids and to make and take offers for purchase or sale of securities, especially, but without limitation, bonds or other fixed income securities.
More particularly, the invention relates to such a securities trading system which is suitable for deployment on the Internet, or an equivalent wide area network to enable a multiplicity of users located remotely from one another to effectively create and transact trades in U.S. government, municipal, corporate or other bonds or other fixed income securities or instruments. It is also contemplated that the invention may be applicable to trading in fixed income futures and derivatives as well as to trading in stocks and stock futures and derivatives, albeit with suitable adaptations of conventional practices as will be apparent to those skilled in the art.
In recent years, many systems have been proposed and employed to facilitate electronic trading in valuable financial securities. Nevertheless, even in the year 2001, available electronic systems fail to provide a trader with adequate functionality to enable him or her to fully realize the potential of electronic commerce.
The invention relates particularly to an improved system for trading securities especially fixed income securities, such as treasury, municipal or corporate bonds, in real time, or near real time, employing electronically linked user stations, which system provides an individual trader with enhanced functionality enhancing the trader's performance. The user stations are equipped for data processing, being, for example, computerized. The Internet provides one suitable medium for linking the user stations and preferred embodiments of the invention are adapted for use with the Internet. Use of the invention with other communications media suitable for linking users stations, such as local area networks, intranets or other wide area networks or modifications or subsets will be apparent to those of ordinary skill in the art.
Financial securities, for example stocks and bonds, oil, grain and other commodities, as well as many other products as diverse as livestock and fine art, have long been traded by means of what is known as an “open outcry auction.” Typically, buyers and sellers assemble at a location where they present bids or offers to the assembled group, via simple vocal bids and offerings, a process sometimes known as a “bid-ask” or “ask-bid” system. In many cases, the presentations are made by a broker acting on behalf of client buyers or sellers. In some instances professional brokers may be required, especially for specialized valuable commodities such as financial securities. Open outcry auctions lie at the heart of traditional exchanges, where they may provide a useful price determining mechanism. While open outcry auctions have provided an effective marketplace for many different products, they can be expensive and inconvenient. Furthermore, open outcry auctions have limited capacity and become increasingly error-prone as trading volumes increase.
Another drawback of the open outcry auction system of market making is a lack of price transparency, in that participating traders may know only the tip of the iceberg of the book of unfilled orders, namely the ones that are vocalized. There is no way for a trader to see or execute on other levels of interest in the market than those that are vocalized.
An important class of fixed income securities are those issued by the United States Government, which are known as U.S. treasuries. There are three different types of U.S. treasuries having different maturity terms at issue, namely, Treasury bills having maturities of 13 to 52 weeks, Treasury notes or “MTNs” (medium term notes) having maturities of one to ten years, and Treasury bonds having maturities of up to 30 years. Treasury bills, being short term instruments, are pure discount securities having no coupons whereas notes and bonds, having longer terms, have a defined payment cycle of semi-annual interest payments to the holder. The interest rate is known as the “coupon”, which term is derived from a detachable paper portion which was found on older, paper, bearer bonds.
Advantages of Treasuries to investors include their low and uniform default risk, attributable to their backing by the full faith and credit of the U.S. government, and their liquidity. Market pricing reflects these benefits.
New Treasury securities issue with a face or “par” value, for example $10,000,000.00, an interest rate or “coupon” payable, for example 5.500 percent and a maturity date, for example Feb. 22, 2011. Such a note constitutes a promise by the issuer, the United States government, to pay the par value on the maturity date. Treasury bills are auctioned by the U.S. government on preestablished auction dates and the auction prices define the issuance yields of the security. After the auction, the Treasuries enter the secondary market and are traded typically “over the counter”, i.e., without a defined exchange. As inflation expectations, supply and demand and other conditions change, so the prices Treasuries fluctuate on the secondary market. These new prices are reflected by competing bid and ask prices communicated among institutions, banks, brokers, and dealers in the secondary market using electronic notification systems such as DOW JONES (trademark), TELERATE (trademark) and BLOOMBERG (trademark). The yield of a fixed income security, such as a Treasury note increases as its price drops in the market, typically reflecting an overall increase in the interest rates for that term of security.
Newly auctioned Treasuries, and other fixed income securities, are traded alongside securities issued in earlier auctions, with the more recently issued securities usually being more active in the market, which is to say traded more often than older securities. Some older securities are infrequently traded, and suffer an illiquid market that may or may not reflect the current, market-determined interest rate for a security of that maturity.
Similar considerations apply to securities from other issuers including other governments, municipalities and utilities as well as commercial entities such as corporations. However, United States Treasuries, by virtue of their security and volume, occupy their own unique, and dominant, position as the most liquid securities in the market. Other bond issuers must pay higher yields to compensate for the market's lower confidence in the issuer's ability to pay, and lower liquidity. Furthermore, other bonds and notes are issued less frequently, in smaller volumes and in fewer denominations. In most cases, emphatically less frequently, smaller and fewer.
There is a need for effective electronic systems for facilitating trading in fixed income and other securities which systems can provide the market-making benefits of the outcry auction, yet which can accommodate high trading volumes with a low error rate and provide enhanced opportunities to brokers or other participant traders to make trades or deals. A number of electronic bond trading systems are known to the art.
In my U.S. Pat. No. 5,915,209, the disclosure of which is hereby incorporated herein by reference thereto, there is disclosed a computer-implemented bond trading system providing a private electronic auction enabling a trader to conduct a private auction to find and transact with a high bidder for, or low offerer of, a bond lot such as a municipal or other fixed income security lot. The auction can be conducted anonymously between remotely located brokers and dealers, across a wide area network, for example the Internet, so that only the trader conducting the auction sees the levels of interest expressed in the bids or offers for the bond lot. It would be desirable to have a trading system providing additional options to the trader.
Harrington et al. U.S. Pat. No. 6,161,099 teaches a method of conducting municipal bond auctions over the Internet wherein a bidder communicates with a bond issuer's computer to compute interest cost values specifying a borrowing cost, and to transmit bids to the issuer. Harrington et al. addresses the primary market wherein bonds are brought to market, and is of no help to traders seeking additional electronic trading options in the secondary market where bonds are traded after issue.